From April 2016 UK banks stopped deducting basic rate tax on interest credited to your accounts.
At the same time they introduced a savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
For many taxpayers, this simply means that they will no longer need to submit a repayment claim each year to reclaim tax deducted at source on their bank interest.
However, where your interest income is over £1,000 or £500, then this legislative change could have unwanted impacts on your tax position. We have outlined two such examples below:
A pensioner with pension and other income below £43,000, but interest receipts in excess of £1,000, would see HMRC adjusting their tax code based upon HMRC’s estimate of their interest receipts for the current tax year. This will mean that their monthly pension receipts will go down, as HMRC will seek to claim the tax due on the estimated interest receipts from their monthly pension payments. This does not mean that such pensioners will end up paying too much tax (assuming HMRC do not overestimate the interest income), but simply that they may end up paying tax on income before they have received it.
An individual who does not receive a pension or salary, but whose total income is in excess of £11,000 and interest income is in excess of £1,000, may suddenly find themselves needing to complete a tax return. This situation would arise because their total income is in excess of their personal allowance and their savings income is in excess of their savings allowance. Where previously no tax return would have been required as no additional tax would have been due beyond that deducted at source by the banks, this simple outcome will not continue.
If you are unsure about your position, or would like any further clarification please do not hesitate to contact us and one of our tax team will be delighted to help.